Handling an MCA debt can be tough, but you can often do it while keeping the shop open. Important, though, to know the difference between settling the debt vs. restructuring it. Settling a merchant cash advance debt is much more risky than settling your credit card debt. Make sure you understand the difference before enrolling in a debt relief program.
Merchant cash advances count as unsecured business debt. Debt relief firms handle unsecured debts. They’ll negotiate with your creditors to try to settle your debts for less than you owe. Settling debts takes time, and is very stressful. Don’t expect fast results.
Many debt relief firms recommend that clients stop paying lenders and default on their advances. They also advise clients to open a bank account somewhere else. For many entrepreneurs, the debt relief process is a nightmare. And even after months of work, there is no guarantee that debt relief firms can settle any debts. So why do this? What is the firm asking you to give up? Is it worth it?
A successful debt relief firm may be able to get a merchant cash advance firm to settle for 25% or less of the outstanding debt amount.
You can save more the worse shape your finances are in.
Of course, nobody wants to file bankruptcy. Small firms often want to avoid filing under Chapter 7 (liquidation) and Chapter 11 (reorganization). If the debt relief firm can settle your debts for less than you owe, you may not need to go that route.
Finishing debt relief is a rewarding feeling. Getting out of debt can feel like the clouds parting. High-interest debts come with a lot of pain. When that’s out of the picture, you can spend more time running the business. You may get cheaper loans to grow, too.
Merchant cash advance lenders generally don’t report to credit bureaus. So, in general, defaulting on an MCA won’t hurt your credit.
But debt relief isn’t for most small businesses. Only for those with serious financial issues. If you qualify, though, relief may help.
Drawbacks to Debt Relief
Tax is often an issue. The MCA lender writes off the forgiven amount as a business loss. Lenders report any debts forgiven to the IRS. The IRS may count it as taxable income. So if you find an option to settle $100,000 for $50,000, you may owe income tax on $50,000. Plan for the bill. For details, see IRS Topic No. 431.
With debt relief, many variables are up in the air. One item that is certain is the fee the relief firm charges. Most relief firms charge clients based on how much debt they enroll. The fee can reach 25% or more of the enrolled debt. Some states limit how much firms can charge.
During the program, you deposit money into an escrow account, where a third party holds it. No money goes to your lenders. The longer you can hold out without getting sued by your lenders, the stronger your bargaining position may be. Lenders may take legal action.
If a merchant cash advance firm files a UCC-1, it claims to have the right to go after your business equipment if you don’t pay. From a legal standpoint, if the lender needs to take equipment that your business needs, and the equipment is valuable enough to warrant taking, they may be able to do so. If the equipment is not worth much, they might not bother. For details, see ValuePenguin.
When lenders hold a Confession of Judgement, they can file a judgement. Through the legal process, you may need to hire an attorney to protect your rights, and that will cost money. For more info, see Business Debt Law Group.
One of the clearest drawbacks to debt relief is the risk it may not work. You stay in default several months, at least. While you are going through debt relief, interest charges and late fees may accumulate on your debts. You may owe more than you did when you started the debt relief process.
Relief May Be the Right Choice
If your business has already defaulted for several months because you can no longer afford the payments, relief may be the right choice.
If you are in severe financial hardship and are facing default, and there isn’t a clear way to avoid it soon, settling may be the best choice.
If your business has closed, and there is no revenue, filing bankruptcy may be a more suitable solution than debt relief.
Debt Restructuring
If default is not inevitable, consider restructuring instead of debt relief. With a settlement, you have months of battling the lender. It gets very stressful at times.
With restructuring, lenders agree on new terms up front. Your lenders keep getting paid. You pay the whole debt back. This is a safer option than debt relief. There is no uncertainty about whether the lender agrees to settle.
Debt restructuring saves you from the stress of default. Restructuring agreements typically double or triple the term, giving you more time to catch up. Payments often switch from daily to weekly. This makes it easier to manage cash flow.
One key advantage is that debt restructuring is easier to qualify for than debt relief. Debt relief firms look at your financial picture closely. These firms need to see that you are in a lot of financial trouble before agreeing to work with you.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
